The relationship between the companies’ political connections and audit fees
| DOI | https://doi.org/10.1108/JFC-04-2020-0066 |
| Pages | 1123-1141 |
| Date | 07 July 2020 |
| Published date | 07 July 2020 |
| Author | Mahdi Salehi |
| Subject Matter | Financial risk/company failure,Financial crime,Accounting & Finance |
The relationship between the
companies’political connections
and audit fees
Mahdi Salehi
Department of Accountancy, Faculty of Economic and Administrative Sciences,
Ferdowsi University of Mashhad, Mashhad, Iran
Abstract
Purpose –The purpose of this study is to investigate whetherthe political connections of companies are
correlatedwith auditor selection, audit fees and abnormal audit fees.
Design/methodology/approach –The research data contains 756 observationsof companies listed on
the Tehran Stock Exchange during 2011-2019. In this study, the relationship between companies with
politicalrelationships and the selection of a qualified auditor, audit fees and abnormal audit fees are reviewed.
The regressionused for test the hypotheses.
Findings –The results of hypotheses testing indicate that there is a positive and significant correlation
between the political relationships of companies and certified auditor selection, auditing fees and abnormal
audit fees. In addition, the political relationships of companies have a significant and inverse effect on the
relationshipbetween institutional ownership and auditingfee and abnormal audit fees. It was also found that
there is a positive and significant correlation between companies and political relationships and abnormal
audit fees.
Originality/value –So far several studies conducted on audit fees,however, no study conducted on the
relationshipof political relationship of the companies withaudit fees and the results of the current study may
bridge thegap in the current field.
Keywords Institutional ownership, Audit fees, Political relationships
Paper type Research paper
1. Introduction
Companies tend to have close relationships with the government and politicians because
these relationships have many benefits to companies such as access privileges to market,
tax cuts, easier access to credit, government subsidies, etc.. Instead, companies with a
political relationship may share the benefits of these relationships with politicians
(Bushman et al.,2004).This type of economic context in society is calleda relationship-based
economy (Chaney et al.,2011). The evidence suggests that the survival probability of
companies with political relationships in times of crisis is significantly higher than non-
political companies(Duchin and Sosyura, 2012).
Companies with political relationships may have strong incentives to reduce the
opposition to the representation of political connections. Therefore, it is possible that these
companies will pay more attention to choosing a more certified auditor and increase the
transparency of accountingcompared to non-political companies (Liu et al.,2017).According
to Guedhami et al. (2014), internal documentationof companies shows that companies with
political relationships are more likely to choose a certified auditor. With regard to the
efficient monitoring hypothesis, institutional ownership is likely to actively manage their
investment due to the percentage of investment. According to this attitude of institutional
Political
connections
and audit fees
1123
Journalof Financial Crime
Vol.27 No. 4, 2020
pp. 1123-1141
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-04-2020-0066
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
investors, there are many investors who have the relative advantage of collecting and
processing information. These shareholders have become one of the most important
components of the capital market in recent decades. Due to long-term investment,
institutional stakeholders in the company tend to spend resources for more oversight in
management. In addition, the existenceof institutional owners in companiesleads to higher
quality financial reporting. Therefore, one of the results of the presence of institutional
owners in companies is to provide higher quality accounting information. One of the main
reasons for improving the quality of accounting information is the demand for higher
auditing quality by institutional owners. As a result, audit fees will increase. On the other
hand, institutional investors in most companies have political relationships. In this regard,
commercial entities with political relationships suffer from high agency conflict and poor
corporate governance. Therefore, they have a higher risk (Tee et al.,2017). Accordingly, it
can be argued that companies with political relationships face higher representation costs
and they are considered by higher risk by capital markets and auditing companies. Thus,
institutional investors in this context demand for higher audit quality, which leads to a
higher fee and increase their monitoring.
The abnormal audit fee includes the difference between the auditor’sactualfeesand
the normal level of audit fees they are expected to pay (Krishnan et al., 2005).
According to Gul (2006) companies with the political relationship are subject to higher
audit fee because of the higher risk in companies with political relationships. The higher
risk of companies with the political relationship is because these companies are
documented to be inefficient and they often have high financial leverage (Johnson and
Mitton, 2003).
The phenomena of auditor selection, auditing fees and abnormal auditing fees are
affected by different factors. Regarding the mentioned issues, oneof these factors, which
has recently attracted the attention of the auditors is the political influence and power of
shareholders and directors. The political influence and power of commercial entity
managers are one of the factors influencing the demand for audit services, the
determination of audit fees and the abnormal auditing fees. Therefore, the greater the
political influence of managers in the business environment, the higher is the demand for
audit services and the higher is the quality of institutions. In addition, companies with
political relationships pay higher audit fees in the presence of institutional owners. Given
the nature of economic relations of the country’s business environment and considering
the content distinction between ownership and management in most companies owned
by the state and its affiliated institutions, it seems that audit reports are affected by the
political influence and power of managers and shareholders affiliated with the center of
power. There is no comprehensive research in Iran regarding the effect of political
relationships on the selection of the auditor and the effect of the mediating role of political
relationships on the relationship between institutional ownership and audit fee and
abnormal audit fees. Therefore, the purpose of this research is to investigate the effect of
political relationships on the auditor selection and the influence of the mediating role of
political relationships on the relationship between institutional ownership and audit fees
and abnormal audit fees.
As mentioned, the present researchseeks to answer the following question whether there
is a significant relationship between the political relationships of commercial entities and
auditor selection.In addition, whether the political relationships have a mediatingrole in the
relationship between institutional ownership and the determination of audit fees and
abnormal audit fees.
JFC
27,4
1124
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